Hearings have been held recently in both the House of Representatives and the U.S. Senate on so-called “beneficial ownership” legislation to fight terrorism and money laundering by compelling both newly formed and already existing corporations and limited liability companies to disclose to the government every individual who “directly or indirectly” has “a substantial interest in or receives substantial economic benefits from” or exercises “substantial control” over the entity. The legislation under consideration in the House of Representatives is Section 9 of the Counter Terrorism and Illicit Finance Act, and the Senate legislation is S. 1454. The legislation requires people responsible for new and existing corporations and LLCs to report the name, address and an unexpired driver’s license or passport number to the government for every individual who meets this standard, as it may be ultimately defined by regulators. These bills require updates within 60 days of the occurrence of any change in the list of people meeting one of these definitions, or any of the identifying information previously disclosed about them. The legislation includes criminal penalties. These legislative proposals have engendered considerable debate on Capitol Hill for many years. Clay Fuller of AEI and David Burton of Heritage will join us to discuss the new legislation and what it would mean for American businesses.
David R. Burton, Senior Fellow in Economic Policy, Roe institute for Economic Policy Studies, Institute for Economic Freedom and Opportunity, The Heritage Foundation
Clay R. Fuller, AEI Jeane Kirkpatrick Fellow, American Enterprise Institute
Teleforum calls are open to all dues paying members of the Federalist Society. To become a member, sign up here. As a member, you should receive email announcements of upcoming Teleforum calls which contain the conference call phone number. If you are not receiving those email announcements, please contact us at 202-822-8138.
Automated: Welcome to the Federalist Society's Practice Group podcast. The following podcast, hosted by the Federalist Society's Litigation and Corporation and NI Trust Practice Groups was recorded on Friday, April 6, 2018 during a live teleform conference call held exclusively for Federalist Society members.
Micah Wallen: Welcome to the Federalist Society's teleform conference call. This afternoon, we will be discussing new legislation regarding beneficial ownership. My name is Micah Wallen, and I am the Assistant Director of Practice Groups here at the Federalist Society. As always, please note that all expressions of opinion are those of the expert on today's call.
Today we are happy to have with us David Burton, who is a Senior Fellow in Economic Policy at the Heritage Foundation. We also have with us Clay Fuller, who is an AEI Jeane Kirkpatrick Fellow of Foreign Policy at the American Enterprise Institute. David Burton will start us off with remarks, and then Clay Fuller will follow. Afterwards, we will go to an audience Q&A. Thank you for speaking with us. The floor is yours, David.
David Burton: Thank you. Um, let me just take a couple minutes and explain what these various proposed, uh, bills would do. And ... There's really three of them, they're all very similar with some minor differences. Uh, the first is the Corporate Transparency Act introduced in the house by Congressman Maloney and in the senate, uh, by Cong- or Senator Wyden and Rubio.
Uh, there's also, center of the White House is, too, Incorporation Transparency for Law Enforcement Act or Title Act. And then the third, and the one that I think we'll probably be focusing on, is the Counter Terrorism and Illicit Finance Act, a discussion draft of, which was released by Congressman Pearce in November of last year, and a hearing was held on that discussion draft, uh, on November 29th.
There's also been a hearing in the Senate, uh, earlier this year, in February I believe. So what, uh, the discussion drafts and the other piece of legislation we're doing, we'll be doing poses on all corporations and LLCs a responsibility to report on their benefits of ownership. And with an exempt, public companies, government sponsored enterprises, banks, brokerage dealers, exchanges, embezzlement companies, insurance companies. Uh, and utilities, most tax exempt organizations and then probably most importantly, all businesses with more than 20 employees, uh, and grocery sheets greater than five million.
So what does that mean? That means that the only people really subject to the reporting regime are small firms with either less than five million dollars in receipts or 20 or f-fewer employees. Now the exemptions are not self effectuating, and that's an important point. Uh, if you don't follow the appropriate form with FinCEN under, under the, the discussion draft, then you'll be subject to the financial and criminal penalties, uh, in-involved in the law. At first, it applies only to newly formed entities, but after two years, applies to all corporations and LLCs and requires the information to be updated within 60 days.
Now, let me walk through some of the other sort of issues. There are, uh, it requires the beneficial ownership to be reported and then define the beneficial ownership in a very unconventional and, frankly, uh, deeply ambiguous way. It uses language like, "...directly or indirectly through any contract arrangement understanding relationship or otherwise exercises substantial control," and talks about, uh, substantial control as a practical matter and then uses t-terms like substantial economic benefit. So it's not using beneficial ownership in the way we would use it in securities law or in corporate law. It creates its own, uh, m-massive set of ambiguities that we're expecting the smallest business in America to figure out.
There's also some very poorly drafted look through rules. If they don't have the look through rules, then you can simply evade the act by having a two-tier corporate structure, but the look through rules are a mess. The ... but they also raise problems. Imagine that you're an entrepreneur with under five million in receipts or less than 20 employees, and a venture capital firm invests into your business. Well then, as the entrepreneur, you're obligated to report in effect on the beneficial ownership, uh, of the venture capital firm. And the venture capital firm is probably exempt and may not even know its beneficial ownership. And in addition, you have no means of compelling the VC to give you that information. And the price of not doing it and then reporting on changes in the VC ownership within 60 days, they say you're a felon.
Uh (cough) ... There are other a-a-a difficulties with the, the way it was drafted. It consistently uses the term applicants. The term's not defined. It's also not a term that's ever used in corporate law when entities are being formed or a tax law or anywhere else. So imagine you're a church formed in 1900 incorporated, uh, and the question becomes, who's the applicant? Who's gonna go to prison if you don't keep up to date with the FinCEN rules? Is it the, the pastor or the church treasurer?
Then (cough) there, it's ... My estimate is that this will effect approximately 12 million, uh, businesses a-and churches, synagogues, mosques, whatever, it, that are corporations or LLCs. And if even, i-if we achieve only a 90 percent compliance rate, which is actually pretty high since most small businesses guys and church treasurers don't keep up with the latest in FinCEN money laundering rules, uh, that's gonna mean you have 1.2 million inadvertent felons made out of otherwise law-abiding people.
Now, let's think for a second about the motivation here. I think the true motivation is to take care of the banks, because there's a Customer Due Diligence rule promulgated by FinCEN that takes effect on May 11th. And the, the legislation will place a temporary moratorium on that rule until it is, uh, rewritten consistent with the act. Uh, that, I think, is what's driving it. If you look at the, uh, list of uh, organizations that support this, they're all financial institutions, banks, investment banks like, uh, SIFMA, the American Banking Association, the credit union, so on. The list of people or organizations that oppose it consist almost of the entire rest of the economy, the U.S. chambers, the manufacturers, the retailers, every small business group that's not an Obamacare front group, and so on down the line.
So (cough), but the problem with it is two fold. One, they should simply directly go after the rule and place the moratorium on the rule to, to the extent there are problems with the rule, and I think there are. Uh, they, they should, uh, work with the new administration, place the moratorium on the rule, and then, uh, (cough) handle it that way.
Uh, the other point is, there's no reason to believe that FinCEN, who has historically showed very little interest in Private Sector Compliance Clause, uh, won't just do what the British did which is have the CD rule and a Beneficial Ownership Reporting Regime. So it may not even and, help the, the uh, the banks. And what they're basically trying to do is impose a massive administrative burden on banks and, and, and the churches of the country to help the banks, and it may not even do that. More im-importantly, the way the bill is written, any money launderer or, or other person trying to engage in illicit finance with an IQ over 40 can avoid the rule. It only applies to corporations and LLCs. So through the simple expedient of forming a partnership or business trust, you avoid the rule. If the look through rules aren't written right, and they probably can't be without creating a revolt, then a simple expedient of a two-tier corporate structure will enable people to get around it.
And then there's the illegal ways to get around it that are rather simple as well. You simply put your secretary's name down instead of your own and, and you're good to go. Because there's only 40 million dollars, uh, provided to administer this entire system involving 12 million or more businesses and requiring updates, in some cases several times a year, and 40 million dollars in the federal government isn't very much money to administer something like that. So there isn't the resources to do anything like in-, regular audits. There would be no enforcement money. So this will be an effect, uh, just uh, a tremendous burden on law-abiding citizens what-, and will do nothing to further its stated names of, of catching people involved in il-illicit finance.
Lastly, uh, there is a better way. All of this information that they're seeking is already available at the IRS. There are six IRS forms that provide, uh, even more information than the bill would, would require the K-1's on 1065's, 1120S', and 1041's, also 1099-DIV's, and then, uh the SS-4 when you originally apply for your EIN and, and the 8822B that requires (cough), um, people update their responsible party information. With that information, the IRS could create a database that uh, provides more information than the bill would have, more comprehensive information, be more useful to law enforcement and allow them to do look throughs when entities own an interest in entities. Uh, the only thing we would need to have to change is Section 60103 which are the privacy provisions allowing FinCEN to look at this information. There's already such information for other law enforcement inf-, uh, agencies. The problem is the politicians don't wanna do that, because it's not within the House Financial Services jurisdiction. It's nobody's means committee jurisdiction. So again, because Congress can't get its jurisdiction aligned together, we're supposed to accept the imposition of this massive, complex, uh, scheme on the smallest businesses in America and, and religious organizations. Uh, and, and I just view that as unacceptable.
So the law, in short of it is is that we, there's a better way to get this information to law enforcement. Or if we wanna do it, there's absolutely no need to impose this, these burdens, uh, on small businesses and, al-, the larger businesses that are exempt. And, uh, this will do almost nothing, uh, to uh, aid its stated aims of, of countering illicit finance. So with that, I-I'll hand it over to Clay.
Clay Fuller: Thank you, uh, to the Federal Society, for inviting me to this uh, teleform. And thank you to David uh, for all of your hard work in this area. I do share some of your uh, concerns outlined there, but as a Foreign and Defense Policy scholar, I kind of take a very uh, different approach to understanding this legislation.
So in this sort of opening statement, I wanna give a brief outline of my thinking on illicit finance in general and then transition to my sort of particular views on beneficial ownership in this specific legislation. So to state it in a simplistic, or maybe not so simplistic sentence, um, not sure that I trust the IRS to share data, uh, but I like the house draft more than the Title Act. I think updating the ani- anti-money laundering regime will actually maximize gains from efficiency by reducing regulatory burdens for banks, and it will increase competition among small businesses. And I support it-its passage mostly out of national security concerns.
So to explain how I got to that, uh, in graduate school, I studied mostly modern authoritarian states and how they survive in the global modern economy. So in the economic foundations of authoritarian rule, which was my dissertation, I argue that authoritarian rule, by nature is based quite simply upon economic arrangements that are political in nature. Democracy, on the other hand, by design is based upon institutional rules that secure individual rights and provide for independent arbitration of dispute. So in other words, authoritarianism, in its character, is opaque and violent because it has fluid rules and has an absence of independent arbiters.
Now to get how this relates to beneficial ownership, in the Post-Cold War era, western democracies opened up their markets and actively sought out economic integration with authoritarian states. Many hoped, and some still do, that modernization theory would create middle classes that would turn around and demand democracy from these autocrats. Most I think, in the west, saw new markets and opportunities to turn a profit, and that's good. The profits mostly came to fruition. But this integration with authoritarian markets, in my view, has morphed into a sort of messy entanglement, or essentially a rules-based liberalism entangled with opaque, violent, and economically-based authoritarian rule. Non-democracies simply just do not have a private sector like democracies do. Non-democracies simply cannot credibly commit to securing private individual rights like democracies can. It was a naïve move in my view. It was naïve of us all to expect non-democracies to play by the same democratic capitalist rules of the west, but that's how we got to today.
So now with talk of renewed great power competition, I believe this great power competition will have its fights and battles in boardrooms: stock markets, trade wars, and giant swelling compliance departments rather than anything that resembles a traditional battlefield or any type of arms race. Now personally, I'm not sure if this is good or bad news, but it's reality, and the sooner we recognize it, I think the better we can craft policy and maintain our comparative advantage in this competition.
With threats from Russia, Iran, North Korea, terrorism, transnational criminal organizations, and China, I see a common national security threat. Bad actors want and often need access to U.S. markets. Now, we dutifully allow them in, but we do so without stringent conditionality that they operate by the same democratic capitalist rules. In many cases, like good economists, we just assume that all actors have a mostly pure profit motive. But absent of the rule of law as we understand its role in classical liberalism, authoritarian political economy is just plain different. Politics and economics are often indistinguishable in non-democracies. So actors with, lets say, an altered profit motive, enter the U.S. market, right, this is good. New customers and producers are a good thing, until we face some sort of negative externality. A negative externality, like say an opioid epidemic, a massive fraud scandal, or maybe a huge terrorist attack, right. So the bank, the Bank Secrecy Act was passed in 1970 to limit the financing capabilities of the cocaine cowboys that were already here. The Patriot Act was created to expand tools in response to 9/11. Now, this sort of haphazard, ad hoc creation of anti-money laundering rules in the U.S. is riddled with loopholes. But you know what? I think this is actually fine. I think that the AML regime is simply a result of the founders' de-design of U.S. government to specifically, to prevent the government, government overreach.
However, in today's global market system, which is unlike any the world has ever seen before, I feel like it may possibly be too dangerous to wait until the next giant negative externality, whatever it may be. It's too dangerous to wait until then to apply another patch. So the fact that foreign nationals can achieve anonymity and ownership through a wide variety of means is full-stop dangerous. For example, the GAO recently reported that the General Services Administration cannot identify the beneficial owners of up to a third of high-security leases. This means that a Russian oligarch could own the building that the FBI leases to investigate Russian oligarchs. Seems like an issue. Second, a recent investigator report uncovered that there are reportedly thousands of planes in the U.S. Planes, that are registered to shell companies known to provide services to non-U.S. citizens that we cannot identify the owners of. Planes transport drugs. It seems like this would be a big concern in the post-9/11 world. Third, there are renewed and new called now to look into the use of anonymous companies in the financing of proliferation, which I'm sure compliance departments have heard about, called FOP. But most of the arguments against beneficial ownership are more economic and domestic.
So my views there, I'm adamant that registries should not be made public. They should be available to law enforcement by subpoena or some other process. Individual rights such as privacy and property are what make our economy prosperous. They have to be jealously guarded. Second, the legislation should address and alleviate the cost of compliance for financial institutions and focus on increasing competition for small businesses. For financial institutions such as banks, compliance departments are not profit centers. They are net cost centers, and these costs get passed down to the consumer. Treasury C-Customer Due Diligence Rules, or the CDD, that come into effect next month, provide a clear definition of what beneficials, b-beneficial owners are for banks and clear instructions on how to deal with complex structures.
A less covered issue that doesn't get talked about is currency transaction reports or CTRs and suspi-suspicious activity reports or SARs, have not really been updated since the 1970s. Uh, for instance, the amount for currency transaction reports uh, today at 10,000 dollars, still have not even been adjusted for inflation. So law enforcement might not like, uh, the proposal in the house draft to increase the amount to 30,000, because that takes away some of their information. But I think this is a pragmatic move that will actually increase efficiency within private banks, law enforcement, and for consumers, 'cause outdated filing systems and rules for CTRs and SARs lead to protective and unnecessary filings that clog the system and cause many other unanticipated problems. They need to be updated. No one I know l- that l-looks at this stuff says we should abandon these.
Uh, beneficial ownership will actually help small businesses in the sense that it will likely push some politically and criminally motivated actors out of the legal market, creating less distorted competition among firms. So for example, if you have small American shipping company X in small town Arizona, they have to turn a profit in order to pay their employees and stay open. Now drug cartel shipping company Y anonymously own in the same town has no need to turn a profit. All they have to do is not get caught. In doing so, they can and they do swallow up other small fare competitors. Second example, government contracts typically have set-asides for small business. Anonymously owned shell companies have a long record of defrauding the government by underbidding fairly competing small businesses for these contracts and then not delivering.
One other issue is with data collection. Like I've said before, if Congress wants to try and legislate a way for the IRS to collect and share data, then they should. But I don't think this is a good idea, seeing how the IRS's mission is tax-focused and FinCEN's is national security. The argument that the burden of filling out a form is just too much to ask of a small business owner is just not realistically justifiable in my view. From my view, the point of argument is tantamount to saying that we shouldn't verify citizenship before handing out driver's licenses.
The other argument that this will cost an average 5,000 dollars in attorney's fees to millions of small business owners is relatively confusing as well. If this were true, I would venture to think that the American Bar Association would support the measure, but instead, they are soundly against it. I understand concerns of attorney client privilege, but this will always be a concern in all legislation.
The argument that the legislation will create millions of inadvertent felons is also somewhat confusing to me. I'm not a lawyer, but I'm pretty sure that the knowingly and willingly clauses protect from this predicted dystopian future. Now I agree that AML laws hurt poor developing countries, but that's not a valid reason to block these laws. De-risking by financial compliance departments is a real thing, but this is an area where the U.S. government can actually continue to lead the world in setting an example for other countries on how to run a modern AML regime and beneficial ownership in a pragmatic, limited way.
I also agree with opponents that it is impossible to measure counter-factuals, that is the crimes and disasters that AML laws have prevented. I agree that it is far easier to measure the instances where laws have failed, but this cannot logically be constructed as overwhelming evidence that they do not work. Beneficial ownership registry is kept private, strike a pragmatic balance between the duty of government to provide the public good of national security and the privacy of private enterprise to produce private goods. It will maximize gains from efficiency and finance business and law enforcement. This, I believe, is the proper role of government: limited, balanced, and pragmatic. And I think that finding this proper balance in a bipartisan way with beneficial ownership is not only very possibly today, but it is absolutely necessary for the economic strength and national security of our country, and I would ask David to please work with me in coming up with a solution that's acceptable in this matter.
Micah Wallen: [crosstalk 00:24:25] Uh, thank you so much uh, both of you, for those opening remarks. It was very enlightening. Uh, uh David, did you uh, wanna, wanna respond to anything Clay said for a few minutes before we go into the, the Q&A?
David Burton: Sure. Um ... I guess, a, a couple ones. There's probably nobody in this city more concerned about the sharing of tax information than me. The, I've spent a lot of time, successfully so far, in trying to stop for example, the uh, protocol many multilateral, conventional, mutual administrative assistance and tax matters. It's currently in front of the Senate, would share financial account information with uh, countries throughout the world, including the Russians, the Chinese, the Pakistanis, the Colombians, and a lot of other people that are gonna abuse the information. There is, uh, on the part of tax authorities and uh, uh folks like FinCEN, an utter lack of concern about the costs that are imposed but also what governments they share the information with. And there, that needs to end.
This is going to affect 12 million at least, uh, businesses. And the, uh, as, as it should be evident, would be evident to any of you who want to read the, the actual draft legislation, it's quite complex. It's not a simple thing to comply with. Even assuming that, uh, a small business owner can uh, read, absorb, and implement these rules in an hour, uh, then the cost to the economy's gonna be 600 million dollars. It's more likely that they will throw up their hands, because even lawyers have difficulty figuring out what the various provisions mean, and have to retain council.
Uh, and by the way, that 600 million dollars is pricing the economy at 50 dollars an hour. The odds are is it's gonna cost many billions of dollars to, to, to the private sector. There's a reason why the entire business community, except for the banks, opposed this. And, you know ... Clay can make light of that, but the bottom line is this is going to be massive new regulatory burden on the smallest businesses in America. And it does target the smallest businesses in America. And Clay and his, up in the hills, said that's precisely what he wants to do, to target the smallest businesses in America. And I, you know, I may be uh, mistaken, but I do not think that the dry cleaners and main street shop owners of America pose the largest money laundering threat in the United States. And pointed fact, the fines are almost exclusively the financial institutions that are exempt here and would, under the bill, uh, be out from under the Customer Due Diligence Requirements of, uh, that, that FinCEN's imposing.
So I think this bill has it precisely backwards, and the, the, the o-other I guess, uh, uh, thing is that the, it really is one of those many federal rules that create the appearance of action when in pointed fact, it's not really gonna get anything done, because it is so easy to evade. It's easy to evade legally, because of the way it's drafted, and it would be easy to evade illegally, because there's going to be no enforcement behind this unless we want to massively increase the budgets at, at FinCEN so they can actually conduct audits and enforcement.
So th-this, I have to say, is one of the most wrong-handed ideas that I've seen the Republicans grab onto in at least a decade. Uh, until November, this was something that only the far left of the Democratic party supported, uh, people like Senator Whitehouse or Chairman Malone. Uh, but in November, they suddenly got legs politically, because Congressman Pearce dropped the discussion draft. And it's the kind of thing where th-they could potentially pass it with the republican minority, because the vast majority of democrats will probably go along.
Micah Wallen: Uh, Clay, did you have anything to add?
Clay Fuller: Um ... I think my statement pretty much uh, speaks for itself. Um ...
Micah Wallen: Alrighty, well we can-
Clay Fuller: Concerns ... Or you wanna go ahead and go to questions?
Micah Wallen: Oh no, no, no. You can, you can finish your thought.
Clay Fuller: Um ... With concerns about I-I-I think, I don't know for sure, but I'm assuming that this has become an issue with conservatives now today, is because we're recognizing the national security implications of it. And as the, as these come in, conservatives are typically concerned with national security issues, as long, as well as with creating a fair and level playing field economically for all actors. And I think that's what this, this draft bill is, is aimed at doing. And I see it as a, a way to not, I-I don't see it as a big burden on, um, uh, small businesses.
And to, to address the targeting of, of small businesses, the reason why that is, I mean the, the five million dollars or the 20 employees thing, those are pretty much random numbers I don't know who came up with, that can be adjusted for some reason. But the issue, why they focus on small businesses is because larger businesses with bigger than five million dollar receipts and more than 20 employees are typically publicly owned or they're subject to all sorts of other rules that are already on the book that require them to disclose their beneficial owners. And so there's no, there's no need to require them to disclose what has already been disclosed to the public out of their basic structures. Um-
David Burton: There is virtually no such thing as a public company with only five million dollars in receipts. The FCC estimates it costs two-and-a-half million dollars in legal fees alone to go, to become a public company. So y-y-your sense of scale is, is, is wrong. You'd have to be vastly bigger than that to be a public company. Plus, it exempts public companies. The only place where the gross receipts test is gonna bite is for private companies. And it's the smallest companies, again, people probably intuitively think, "Oh, we're gonna exempt the small guys." No, it's the other way around. It only applies to the small guys.
Clay Fuller: Well so, my prob-, my, my question with the, and what I keep coming back to with this, is with the cost and compliance burden. If a small company with less than 20 employees and less than five million dollars in receipts has such a hard time figuring out who the ultimate beneficial onwership, owner is of their company, that might be a problem in itself. I mean-
David Burton: Well, it's the example I gave-
Clay Fuller: I know a lot of small business owners who-
David Burton: If you have-
Clay Fuller: I know a lot of small business owners who easily know who owns their, their company. And I understand what you're saying about venture capitals uh, too, as well, but there are venture capitalists out in California who are Russian, legit Russian investors who wish that beneficial ownership legislation was in there so that they could verify two small startups that they're not part of a sanctioned list, that they're not some kind of front company investor. Because small startups are refusing them because they have a Russian name, and excluding them from, fr-from the market because there's no way to verify who they are.
David Burton: Well, that would be a problem, and in case of venture capital funds, small business investment corporations, any entity that is investing in that entrepreneur and, and, and then you have to do the look through, and the entrepreneur is being obligated to report on the beneficial ownership when it has no legal means of compelling the investor to provide that information, and the investor may not even know it. I mean, a, a lot of FDICs are, are publicly traded. So they're exempt, but the entrepreneur that receives the investment is supposed to report on the beneficial ownership of the FDIC. Venture capital funds are typically private but have a great many investors, and they're gonna change regularly over the period of a year or two, and they're gonna be required to report on that, even though the VC probably doesn't even know that they have entities investing in the, in the VC. You have pension funds that make these kind of investments, which raises a whole nother series of problems. This is not simple stuff. And, and you're asking the smallest businesses in America that don't have big compliance tasks to have to deal with it.
Micah Wallen: Alrighty. Well let's go to audience questions now. Uh, thank you both once again for those opening remarks. Uh, in a moment, you'll hear a prompt indicating that the floor mode has been turned on. After that, to request the floor, enter star and then the pound key on your telephone.
When we get to your request, you will hear a prompt, and then you may ask your question. We will answer questions in the order in which they are received. Again, to ask a question, please enter star and then pound on your telephone key pad.
Looks like we have a question lined up already. Uh, caller, feel free to ask your question.
Chris Garvey: Hi, uh, this is Chris Garvey in New York. Um, the income tax was regarded as uh, inconsistent with the rights of free Englishmen when it was first introduced, and Jefferson bragged that in the, in America, no individual farmer, small businessman, had to deal with the tax man. Um, so, that, the best way to get rid of the tax reporting problems would be to abolish the income tax and go back to a small revenue tariff. Instead of taxing our stuff that we make here at a much higher rate that, that, the stuff that comes in from China. Uh, as for Prohibition, uh, that's the cause of the opiate epidemic. That's the cause of the sentinel getting into the, into the bloodstreams of addicts and killing them.
Uh, and as for abuse by the IRS, the bank reporting requirements give a tremendous amount of opportunity for the IRS to do things like confiscate the entire bank account of a restaurant that is required by their insurance company to put in deposits no larger than 10,000 dollars because the insurance company doesn't wanna be liable for that stuff in their cash registers. Um, and the IRS has taken bank accounts, accusing of such restaurants of structuring their deposits, um, by making them less than 10,000 dollars so they don't have to comply with the deposit requirements.
Furthermore, Dodd-Frank has made it very difficult for small capitalization companies to seek uh, Wall Street and public uh, public structure uh, into their corporations because uh, it, it, the Dodd-Frank Wall Street Reform and Consumer Protection Act, uh, has made so many terrible reporting requirements that there are no new banks and new small companies starting up that are publicly uh, uh, um, offered, um, to Wa-, via Wall Street. And so all these regulations are piling up to cripple our, our economy, and the proposals by, by play are uh, just seem to be adding to it and making it more advantageous to be a large corporation than a small corporation uh, and Mr. Clay might wanna respond to all that stuff I just said.
Clay Fuller: Sir, can you hear me?
Chris Garvey: Yes.
Clay Fuller: Okay. Um, yes. So I, I share your concern with the income tax. I've uh, uh worked on that in previous uh, uh research before where I draw a direct correlation between capping the house at 435 and implementing the income tax. Um, I don't like it. I agree with you completely that Prohibition is what has caused the opioid uh, crisis, but you know, good luck uh, convincing uh, Congress or the executive or anybody to uh, uh, deal with that in a reasonable uh, uh, manner. You know, the DEA has failed since its inception uh, at ad-, at admission, and that's largely where I get at my focus on uh, illicit finance. Um, because that's the best way to stop uh, illegal behavior.
Um, I agree with you the shar-, on the uh, shared concerns about, or I have shared concerns about the piling up uh, uh regulation, definitely, with the uh IRS, I think. Uh, I'm not aware of, I'm not an expert in Dodd-Frank or uh, any of that. I'm not a domestic American economist. I work on Foreign and Defense Policy. But if Dodd-Frank is preventing small companies from becoming publicly offered, then that's something that, that seems like a big problem to me that I think uh, uh, uh people should address.
Um, as for leaning towards giving big corporations more power um, I hope that's not the case. That's not my intention uh, in my support uh, of this legislation at all. I actually believe that it will create a fair, better market for small businesses by getting rid of non-profit motivated actors out of the market. If that needs to be done in a different way, then I'm completely open to hearing suggestions about it. And I think that's why the House has left this as a draft bill, because they're hoping that people will come to the table with constructive arguments um, to do this in a way that, that, that works for national security.
David Burton: I might, uh, add two things. First off, one of the reasons you see the number of broker dealers declining considerably and basically small broker dealers and small banks becoming uh, less and less common in the increasing concentration of deposits and uh, large uh, multinational banks, is the cost of AML compliance, and this basically would put that on steroids. Uh, so it's uh ... This, this would accentuate the problems that you identified.
One is, well you raised a question of the IRS uh, uh piggy backing on the AML rules and the anti-structuring uh, rules. There is a, a, a discussion draft in the Ways and Means Committee that was released um, about a week and a half ago, and the comment period on that ends today. Uh, that would address the, the structuring thing by making it much more difficult for the IRS to assert uh, structuring charge against a, a small business, and you might wanna look at that.
Micah Wallen: Let's go to our next question.
Caller, feel free to ask your question.
Jack Park: This is Jack Park, and I just have a, have a question of clarity. Assume that I, um, I'm a lawyer and set up a solo practice in incorporate and my, I'm definitely under 20 employees, and I ha-, I, it'd be a, a mira-miracle if I made five million dollars. Um, so that's a corporation newly formed. Would I have to do the reporting?
Micah Wallen: If David, you wanna answer that?
David Burton: Yeah. The, the, the answer is unquestionably yes. Y-you would uh, it uh, the general rules that apply with everyone, and you would not fall in one of the exemptions because you have uh, both under five million and under uh, 20 or fewer employees, and only one of those have to be met before the reporting requirements would kick in.
Clay Fuller: So-
Jack Park: Thanks, Cl-Clay, how-
Clay Fuller: Can I please-
Jack Park: How does that serve your purposes?
Clay Fuller: So the re-, the form, the form that I've been shown or seen uh, require, or that are proposed, require your name, your address, and a personal identification number like your driver's license number, and that's it.
Jack Park: Yeah, but I'd have to file it every year, right? With FinCEN?
Clay Fuller: Uh, no. You'd only have to file it when it changes.
Jack Park: Okay-
Clay Fuller: And you'd have to-
Jack Park: But, you know-
Clay Fuller: And in order to be in violation, you would have to knowingly and willingly be providing false information-
Jack Park: That is, there's no Mens Rea requirement in this statute, as drafted.
David Burton: (Laughs) Well, but listen to this then. In teleform, don't I have uh, am I not knowingly and, knowingly violating it? I'm, I'm sorry I'm being sarcastic, but thank you. Thank you both.
Micah Wallen: Alright. Let's go to our next question.
Caller, feel free to ask your question.
Robert Parker: This is Robert Parker. I'm calling from Atlanta, too, and um, I would just, I-I gotta say that I agree with both of you. You make both compelling arguments. It's kinda funny that you both disagree with each other so much, um, because I think there is a need for some sort of, sort of more identification in this country of who owns what. Any foreigner can walk into the country, any Cypriot lawyer, any trust can form a Delaware Corporation or an, any corporation in any state, quite frankly, without any acknowledgement of ownership. Um, simply there's, whoever the president or some officer might be identified in some states, but generally, corporations and trusts and other entities can be formed in this country without any of the kinds of reporting that goes on in a typical um, modern juris-, jurisdiction.
Um, I-I do see that as a problem. I am not in favor of, a lot of reporting, but it seems to me as federalists, we should consider whether or not if the states are forming these entities, maybe the states could take charge of finding out who owns the entity that they're forming. And to the extent that that reporting was done at the state level, it would be an exemption from require, uh, requiring that kind of reporting at the federal level. That would make the information publicly available, um, to anybody who needed to know it, including law enforcement. And maybe not in one registry, or it could be in one registry 'cause the states could certainly cooperate to put it into one registry, but it strikes me as being um, overkill to try to make it a federal, a n-, a new federal requirement.
And yes, Dodd-Frank has led to a decrease in the number of publicly traded companies, just as the Nazi regime that came into power in Germany led to a decrease in the number of publicly ret-, reporting companies as well in the 1930s. Um, because once you start confiscating the profits of a company and start, and start making, making them comply with a lot of regulation, it does lead to a lack of new capital formation and investment in public entities, and Dodd-Frank has had that effect.
David Burton: Well, on the question of the state versus federal, the um, you identify one as the, relatively few differences between the original democratic proposals and the Pearce discussion draft. Both of the democratic proposals, although in the case of the Corporate Transparency Act, Senator Rubio has become a cosponsor, um, would require this information be collected by the relevant state agency, which of course differs state by state. And then uh, uh would provide federal money to compensate them for that. And in, if memory serves me, it's 40 million dollars a year in those bills, too. The actual number's available in the paper I wrote on this subject the, uh, if, if you wanna track it down.
But the, the long in short of it is is that they would require the states initially, just on newly formed entities, and if it-, and within two years, all corporate or LLCs, corporations or LLCs, um, to report this information. And because it's state level and virtually every state has a public uh, or allows the public to view the information, they, they would, it would be a public beneficial ownership database at, in each state. Um, one of the reasons I think that Pearce went down the route of having FinCEN administer it, uh, was so that the database could be private. 4
Um, it also is just simpler because you had the federal government doing it, you have federal rules, and then Congress can, can presumably conduct to some degree, [inaudible 00:46:51] or FinCEN, in a way they just never would be able to with 50 different state agencies plus D.C. (Cough)
Micah Wallen: Let's go to our ne-
Clay Fuller: [inaudible 00:47:06]
Micah Wallen: Oh. Sorry.
Clay Fuller: No, go ahead.
Micah Wallen: Um, I was going to move to the next caller, but if you had some further thoughts on this question, please feel free.
Clay Fuller: Sure, no.
Micah Wallen: Alrighty. Let's go to the next caller.
Caller, feel free to ask your question.
Andrew Sipp: Hi, uh, this is Andrew Sipp. I just wanna come back to some statements Mr. Fuller made, because I guess I'm a bit confused about what bill text he's looking at. I'm looking at the text of the bill, the draft legislation on which a hearing was held, um, in the House Financial Services Subcommittee. Um, it is the draft bill that I assume is being discussed, and when he says that, you know, first of all as noted, obviously, the bill as written applies, not only to newly formed entities, but two years after it becomes effective, it applies to all existing entities. So if you have an existing law firm or corporation that isn't exempt, you have to start doing this. And I don't know how it can be read to say, "This only applies when there's a change." If you look at pages 18 and 19 of the bill, in addition to doing the initial filing, whether you're a new entity or once it kicks in for every existing corporation or LLC, it says that you have to file a new filing within 60 days of any change, not only in the identity of the beneficial owners, but in any of the change, in any change in the address, name, or driver's license or passport number of a beneficial ownership owner that was already provided.
In addition, there's an obligation to do an annual filing, even if nothing changed. It's an annual submission of the same thing. And going to the criminal penalties, what's hard about this is, when you actually again, read the bill text, it is not true that everything is knowing and willful. Some of the provisions all willful, but there is one that is knowing that says it, you know, you can be prosecuted for "knowingly providing or attempting to bribe false or fraudulent information." Now, there is another provision that says, "For willfully failing to update." But if in the first instance or at any time you provide false information, whether it's on an update or anything else, you can, you know, be subject to criminal law. And as ... groups ranging from the ACLU to Freedom Works to the American Bar Association and National Association of Criminal Defense Lawyers made clear. And every lawyer knows, I know Mr. Fuller isn't a lawyer, a knowing violation can be proven just by the fact that you provide information that happens to have been incorrect, whether the person intended to fully comply with the law or was even aware of the law.
So I'm curious to know what text Mr. Fuller's looking at when he makes those statements, 'cause it's, it was brought up at the, early in the call. There are a lot of different versions about this. So when he says that it's ... it so, Mr. Fuller, I'm curious to know which text you're referring to when you say, "You only have to file it, and you don't have to refile unless there's a change in the beneficial owner."
Clay Fuller: Um, I'm looking at the, probably the same, the same text uh, that you have, and you know, I share uh, your concerns uh, with that. And I'm, and I'm not a lawyer, and I'm referring to many conversations I've probably had about how to change the draft legislation uh, for certain, certain aspects of that. And I've known since the beginning that that's been one issue that's compliance with the, the, the, the penalties uh, for the law and how they're applied has been a big concern of uh, many since the beginning that, that, and again, I'm not an expert uh, in, but I-I'll tell you my sort of uh, understanding of how the general thing works is that FinCEN typically doesn't uh, investigate or verify the validity of this information. Um, typically the swelling compliance department at banks, and starting May 11th with the CDD rule comes down, it's on them to do that themselves. And if you read the guidance from FinCEN that came out on the 4th of this month, it's about 25 pages of guidance on how compliance departments are to go through and collect, and verify, and manage, and store, and everything on down the line for the beneficial ownership uh, information that they have to collect on their c-customers-
Andrew Sipp: You're talking about the guidance they put out on April 4th about the CDD rule that's coming into effect on May 11th?
Clay Fuller: Yeah.
Andrew Sipp: Okay, so that's a CDD rule. That's not this legislation.
Clay Fuller: Right.
Andrew Sipp: Okay.
Clay Fuller: So that's what, so that's how it's already, already working. So with this legislation I think, and this is why i-it's a draft bill, and this is why it's important that I wanna uh, uh emphasize that I think we should work together on this and come up with a, a, a good solution that works before uh, things change in Congress. Um, but we, we need to work on that because there's a way for uh, the, the compliance departments will already be managing all that. So, so a lot of this is already going on, so Congress needs to figure out what FinCEN's role is in managing that between the banks and themselves. And I don't, I don't have access to classified information. I have no security clearances, um, so I don't, I don't know how that works.
Andrew Sipp: What are the forms you're referring that you've been shown?
Clay Fuller: I've seen their, the propos-, like different proposals for uh, beneficial ownership uh, information.
Andrew Sipp: Like from genesis or from staff or-
Clay Fuller: No, as it, as it lists it in the draft legislation.
Andrew Sipp: Well there aren't forms in the draft legislation.
Clay Fuller: Yeah.
Andrew Sipp: No, I mean, there's not form, the, there's not a-
Clay Fuller: No, no it, it lists that they want name, address, and identification number.
Andrew Sipp: Yeah, and then it says you have to update it within 60 days of a change occurring, not being aware of a change.
Clay Fuller: Right. I believe.
Andrew Sipp: Of direct and indirect beneficial owners.
Clay Fuller: Okay. So ...
Micah Wallen: Well, seeing no ... Oh. Well seeing no, uh, questions lined up, uh, just like to give a brief reminder to keep an eye out for emails announcing upcoming teleform calls. Our next teleform conference call is scheduled for Friday, April 13th. That call will be a teleform on the 10th anniversary of the Heller Case and the original meaning of the Second Amendment. It will be featuring professors Nelson Lund and Daryl Miller, and uh, featuring moderator Robert Lighter. Uh, you can con-, also consult a full schedule of our upcoming teleform conference calls on the Federalist Society's website at fedsoc.ar- org. Also available there are podcasts of previously recorded teleform calls you may have missed. Uh, not seeing anymore questions lined up, uh, for our speakers. If you would like to have any concluding remarks.
David Burton: Uh, I guess, th-this, the uh, uh in terms of sort of where we are state of play wise. Uh, I know that uh, Chairman Henshall aimed once to try to get a BSA reform bill done before he leaves Congress, uh, which will be at the end of, of this year. So it's likely that we'll see, at least in the House, some kind of BSA reform bill, which of course is desirable. The thing we've been talking about is Section 9 of the, of the discussion draft uh, (cough) which would impose this beneficial ownership reporting. Uh, there's also, I mean, th-the banks want this to happen before the May 11th CDD rules come into, to force. Uh, so there's some reason to believe that they will attempt to move this uh, within the next month.
And (cough) there's also been some movement in the Senate, uh, but I think that's a little bit more problematic uh, but there's been a hearing on this in judiciary, not banking. And (cough) it's possible that this was, would start to try to move uh, there, but it, it doesn't have the kind of support that it seems to have in the House Financial Services where you have some committee chairman pushing it, so.
Clay Fuller: So, I ... I would just say that I, I feel this is a very strong national security imperative and seems very clear to me that this is a good bipartisan chance to actually do something about reforming the BSA/AML regime and doing something about getting bad actors out of our economy, which is where a lot of the future conflicts and problems are going to come from. And so I think this will take some working together from all sides to come up with something that's a good, American solution, a democratic capitalist solution um, that will, you know, make America's markets more efficient and are secure, strengthen our security.
Micah Wallen: On behalf of the Federalist Society, I want to thank our experts for their benefit of their valuable time and expertise today. We welcome listener feedback by email at firstname.lastname@example.org. Thank you all for joining us. We are adjourned.
Automated 2: Thank you for listening. We hope you enjoyed this practice group podcast. For materials related to this podcast and other Federalist Society multimedia, please visit the Federalist Society's website at fedsoc.org/multimedia.